U.S. Stock Selloff Turns Ugly As U.K. Plan Rattles Globe: Markets Wrap

(Bloomberg) -- A selloff in the riskier corners of the market deepened as the UK’s plan to lift the economy fueled concerns about heightened inflation that could lead to tighter monetary policy, boosting the odds of a recession.

It was a sea of red for equity trading desks around the globe, with the rout in the S&P 500 pushing the gauge within a striking distance of its June bottom -- which stands less than 1% below current levels. The lack of full-blown capitulation may be a sign that the carnage isn’t over yet. Big firms like Goldman Sachs Group Inc. are slashing their targets for stocks, warning that a dramatic upward shift in the outlook for rates will weigh on valuations.

As the risk-off sentiment took hold, Treasuries reversed a slide that earlier sent 10-year yields above 3.8%. The dollar hit a fresh record, sweeping aside other currencies. The euro slid to its weakest since 2002, while the pound touched its lowest in 37 years. Traders are focusing on the growing gap between interest rates in the US and elsewhere.

“It appears that traders and investors are going to throw in the towel on this week in what feels like ‘the sky is falling’ type of event,” said Kenny Polcari, chief strategist at SlateStone Wealth. “Once everyone stops saying that they ‘think a recession is coming’ and accepts the fact that it is here already – then the psyche will change.”

The greenback’s strength has been unrelenting and will exert a “meaningful drag” on corporate earnings, serving as a key headwind for stocks, said David Rosenberg, founder of his namesake research firm.

Investors are flocking to cash and shunning almost every other asset class as they turn the most pessimistic since the global financial crisis, according to Bank of America Corp. Investor sentiment is “unquestionably” the worst it’s been since the crisis of 2008, with losses in government bonds being the highest since 1920, strategists led by Michael Hartnett wrote in a note.

Gloomy sentiment is often considered a contrarian indicator for the US stock market, under the belief that extreme pessimism may signal brighter times ahead. But history suggests that equity losses may accelerate even further from here before the current bear market ends, according to Ned Davis Research.

The firm’s Crowd Sentiment Poll has been in an extreme pessimism zone since April 11, or 112 consecutive trading days that mark the third-longest streak of gloom since the data began in 1995. Over the subsequent few months following those periods of extreme pessimistic sentiment, equity gains were fleeting, with negative median returns three and six months after the 100-day mark.

In another threat to stocks, different iterations of the so-called Fed model, which compares bond yields to stock earnings’ yields, show equities are least appealing relative to corporate bonds and Treasuries since 2009 and early 2010, respectively. This signal is getting attention among investors, who can now know look to other markets for similar or better returns.

The S&P 500’s breakdown since the August peaks solidifies the downtrend channel in place since the bull market apex in early January, according to Gina Martin Adams at Bloomberg Intelligence. “The breakdown beneath 3,900 support leaves little for the index to grasp at on its way to testing the June lows,” she wrote in a note. 

As central banks around the world stepped up their fight against inflation at the cost of growth, oil headed for the longest stretch of weekly losses this year. West Texas Intermediate dropped below $80 a barrel for the first time since January and was set for a fourth week of declines.

Here are some of the main moves in markets:

Stocks

• The S&P 500 fell 1.7% as of 9:59 a.m. New York time
• The Nasdaq 100 fell 1.8%
• The Dow Jones Industrial Average fell 1.3%
• The Stoxx Europe 600 fell 2.3%
• The MSCI World index fell 1.9%

Currencies

• The Bloomberg Dollar Spot Index rose 0.9%
• The euro fell 1% to $0.9739
• The British pound fell 2.1% to $1.1022
• The Japanese yen fell 0.5% to 143.06 per dollar

Bonds

• The yield on 10-year Treasuries was little changed at 3.72%
• Germany’s 10-year yield advanced four basis points to 2.01%
• Britain’s 10-year yield advanced 32 basis points to 3.82%

Commodities

• West Texas Intermediate crude fell 5.4% to $78.94 a barrel
• Gold futures fell 1.8% to $1,651.20 an ounce

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